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The flagship FHA Streamline Refinance program works well, but could benefit from adjustment.
The FHA Streamline Refinance is a unique mortgage product, available to homeowners with existing FHA home loans only. The program was built to be the fastest, simplest way for an FHA-insured homeowners to refinance their respective mortgages.
The FHA Streamline Refinance's big draw is the leniency of its underwriting standards.
Click here for an FHA mortgage rate quote.
When you use the FHA Streamline Refinance program -- according to the FHA rulebook -- your income is not verified; your employment is not verified; and, your credit scores are not verified. So long as you've made on-time payments for the last 12 months, you're a shoo-in for approval.
Yet, there are 3 groups of homeowners for whom the FHA Streamline Refinance remains out of reach.
The FHA can take a page from the government's revamped HARP program, and work to make more homeowners eligible for its FHA Streamline Program.
Here's what the FHA can do.
The FHA Streamline Refinance is the most lenient mortgage product on the market. There are virtually no verifications.
The FHA's stance is that -- irrespective of your credit score, or your employment -- if you're making payments on your mortgage at your current rate, you're likely to keep making payments on your mortgage at some lower rate, too. It's about as "common sense" as mortgages get.
Lenders, however, don't underwrite to FHA minimum standards. Instead, they build additional hurdles for FHA Streamline Refi applicants to clear. In industry parlance, these are called "investor overlays" and, for the FHA Streamline Refinance, overlays include verifying employment and debt-ratios, and requiring credit scores of 640 or higher, in most cases.
The hurdles aren't high, necessarily, but they stymie loads of otherwise-qualified FHA Streamline Refinance applicants; people that have never been late on a payment who are just looking for payment relief.
Now, the reason the banks raise standards beyond FHA requirements is because the FHA holds banks responsible when they make "bad loans". When banks make too many bad loans, the FHA fines the bank and may revokes their FHA lending license. Banks don't want that risk.
If the FHA would absolve lenders of certain risks associated with underwriting FHA Streamline Refinances, many more Americans would be streamline-eligible.
The FHA Streamline Refinance guidelines state that a homeowner's new loan balance may not exceed its current balance. All costs and prepaid items, therefore, must be paid in cash at closing.
It's one reason why zero-cost FHA Streamline Refinances are so common.
With a zero-cost FHA Streamline Refinance, the lender pays all closing costs on behalf of the homeowner, reducing the amount of cash that the homeowner needs at closing. This might only offer small relief, however. In states with high real estate taxes, depending on the time of year, prepaid items such as tax and insurance escrow can run $9,000 or more.
Few homeowners have that type of cash on-hand. As a result, they can't use the FHA Streamline Refinance program -- they don't have the funds to repopulate an escrow account at closing.
If the FHA changed its FHA Streamline Refinance guidelines to allow "adding escrows to the loan balance", more borrowers would be able to use the program.
On a county-by-county basis, the FHA set different "loan limits", the maximum loan size that the FHA will insure. Loan limits are based on an area's median home price, with an absolute bottom of $271,050.
This is a relatively "new" loan limit for most FHA-insured homeowners.
Between early-2008 and September 2011, as prescribed by an economic stimulus program, the FHA raised loan limits in every county in the country. And during those three years, the FHA's purchase market share tripled from 10 percent to 30%
With the stimulus expired and loan limits returned to their former levels, thousands of FHA-insured homeowners are locked out from the FHA Streamline Refinance program because their loan sizes exceed local FHA loan limits.
By contrast, Fannie Mae and Freddie Mac use a uniform, national loan limit of $417,000.
If the FHA changed its loan limit policy to match the conforming mortgage market, more FHA homeowners could take advantage of the FHA Streamline Refinance program.
One of the FHA Streamline Refinance requirements is that homeowners must get some form of benefit from the refinance. In general, the FHA wants to see every refinancing homeowner save at least 5% on their monthly payment.
The FHA calls it a "Net Tangible Benefit". It's calculated by adding your current (principal + interest) to your current monthly mortgage insurance payment and comparing that figure to the same sum on your new mortgage.
Without the 5% savings, there's no refinance.
Most homeowners meet the Net Tangible Benefit requirement, despite today's higher mortgage insurance rates. A modest mortgage rate reduction is often enough to meet the 5% savings. However, because of the Net Tangible Benefit mandate, it's virtually impossible for homeowners to refinance from a 30-year fixed rate mortgage into a 15-year one.
15-year mortgage terms carry larger monthly payments than comparable 30-year terms so homeowners are precluded from using the FHA Streamline Refinance to shorten their respective mortgage length.
If the FHA reclassified "reducing loan term" to be a Net Tangible Benefit, more FHA-insured homeowners would use the FHA Streamline Program.
The FHA Streamline Refinance is an excellent program with lots of success stories. It remains the fastest, easiest loan program in the country. With some changes, however, the FHA could put the program in the hands of more U.S. homeowners, potentially lowering mortgage payments for hundreds of thousands of families nationwide.
With mortgage rates still this low, there's a lot of good that can be done.
Dan Green (NMLS #227607) is an active loan officer with Waterstone Mortgage. Email Dan ator click to get a free, no-obligation rate quote.
You can also find Dan on Twitter and Google+.
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